Can they pay?

Posted on Monday 4th April 2011

In making a claim it is always sensible to consider if they can pay what you say you are owed.  It is a harsh but universal truth that you can't get blood out of a stone.  Furthermore, as society has become generally softer, the mechanisms available to a creditor to squeeze money out of a judgment debtor have become less effective.

This should not be a problem for the private investor or small business with a claim against a financial adviser, stockbroker or similar body.  This is because regulated deposit takers (i.e. banks, building societies and similar) and financial advisers and other investment firms have to meet stringent capital adequacy tests set by the Financial Services Authority (FSA).  In the case of banks the capital adequacy is provided by the minimum deposits that banks have to retain or deposit with the Bank of England.  In the case of financial advisers the FSA's rules require, in practice, professional negligence insurance.

So in theory there should never be any problems with actually getting your money.  In practice there are surprisingly common difficulties.

As to banks, we know from recent history that there have been runs on banks and building societies.  The most recent was the run on Northern Rock.  Banks do not have to have professional negligence insurance covering their deposits but in practice the Government, through the Financial Services Compensation Scheme (FSCS) is insurer of last resort.  The FSCS will guarantee up to £85,000 of any deposit by an eligible claimant - basically this includes private individuals and small businesses.  In practice, however, in the last 100 years or more no UK authorised bank has defaulted on its obligation to return money deposited with the bank.  

The financial obligations of investment firms are not nearly so secure.  My firm has had a steady throughput of clients who have been refused payment by the insurers of financial advisers and stockbrokers.  

Let me give some current examples. One involved the stockbrokers Wills & Co Ltd. where our client has been refused compensation by the insurers on the grounds that Wills & Co did not notify his claim to the insurers. In that case we have obtained judgment, and in due course will seek to enforce it against the insurers. In another case the insurers of Capital Finance and Planning Ltd are refusing to pay on the grounds that the liquidator of the company admitted the claim in its insolvency instead of referring it to them.  In a third claim, against Pritchards a firm of stockbrokers, we were told the insurers had repudiated cover on the grounds that our claim against them referred to "wilful default".  However, in the event the insurers appear to have relented because our client has now been paid in full.

It has to be said that the financial advice arms of the banks, for all their faults, at least do not suffer from this difficulty.  Banks do not default on their obligations although financial advisers all too often do.

How can this problem arise? It is because a contract of insurance is no more than a contract between the financial firm and the insurers. The individual clients have no rights under it, save those conferred in the event of insolvency of the financial firm by the Third Parties (Rights against Insurers) Act 1930 (soon to be replaced).  Enforcing rights against insurers direct can be problematical, although not impossible. We hope to do this our case against Wills & Co.

When there is no insurance the FSCS will again step in but only up to £50,000 per client per claim.  That maximum sum is often inadequate as losses in financial services matters are often very much larger than this.

How do you avoid this problem?  The important thing to remember when you first make your claim is to insist that the claim is referred to the financial firm's insurers.  That will put the insurers on notice and it then becomes more difficult for them to avoid paying out. Thereafter, if you do get into difficulty, take legal advice early.  So many of our clients go, unthinking, to the Financial Ombudsman Service (FOS) and then to FSCS without thinking what else they might be doing to protect their position against the insurer. When they ultimately come to us they present us with a bigger mess to unscramble than would have been the case had they come earlier.